European Central Bank | Global markets could face sudden drop

The European Central Bank says broad-based economic growth is keeping banks and markets stable in the 19-country eurozone — but warned that increased risk-taking by global investors could mean trouble down the road.

The ECB made its comments yesterday in its twice-yearly financial stability review. The review aims to keep the public and government officials aware of potential problems that could disrupt the wider economy.

The report said the eurozone’s increasingly robust economy “is supporting financial stability” and that there is no widespread overvaluation in eurozone’s financial markets.

But markets remain vulnerable to sudden turns if investors get bad news that changes their risk outlook. The report noted that recent increased risk-taking in financial markets could “sow the seeds for large asset price corrections in the future.”

The ECB noted that investors continued to favor riskier investments such as bonds issued by less creditworthy borrowers, a move boosted by expectations that central bank stimulus policies will continue. The ECB noted that such behavior has continued even though central banks such as the ECB and the U.S. Federal Reserve have made clear they are recalibrating their policies. “Financial markets may not be fully alert to the possibility that the current favorable market sentiment can change quickly,” the report said. Bloomberg